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Using EMI Calculator For Your Loan Planning

This post is contributed by Paisabazaar.

The capability to fulfill our personal goals gets a boost, when we take a loan to accomplish them. A loan can be taken for the purpose of buying home, car, children’s education, wedding etc.

Once you opt for a loan, you have to pay EMI. EMI stands for equated monthly installments, in which the borrower pays the lender a fixed amount every month, till the tenure of the loan gets over. It comprises of two elements, one is the principal and other is interest.

In the initial years of loans, the EMI is more bent towards interest and less over principal. With the passing years of loan, the EMI gets bent more towards the principal component than the interest, thus paying the principal in entirety to the bank.

A. Rate of Interest for Equal Monthly Installments or EMI

While opting for a home loan, it can be taken on either fixed interest rate or floating interest rate. 

In case of fixed rate, the borrower agrees to pay a pre-decided interest rate throughout the tenure of the loan. The borrower is protected from the risks of change in the interest rate due to market fluctuations. Generally, loans on fixed rate of interest are on the higher side, as compared to floating rate of interest.

In case of floating interest rate, the interest rate can change during the tenure of the loan, depending upon the changes in the market conditions. It consists of 2 elements, one is the base rate and other is floating element. It can change either on the higher or on the lower side.

Generally, loans with long tenure have less EMIs, as compared to shorter tenure loans.

Also, prepayment made during the loan tenure might affect your EMI. Prepayment means paying a lump sum amount, apart from your monthly EMI, to the bank or financial institution. Prepayment is made directly towards the principal amount. After making prepayments, you can either 
(a) reduce the tenure of the loan, by not making any changes in the EMI or 
(b) you can simply reduce the EMI by keeping the original tenure of the loan.

The bank or financial institution providing the loan, gives the borrower a schedule of loan which is an excel sheet.

It shows details about the loan like the borrower's name, lender's name, loan amount, the date of commencement of loan and the period of loan. Also, it gives month-wise break up of EMI stating what is contributed every month towards the principal and interest. This schedule gives the borrower a clear picture of how the loan has commenced, and how the EMI is contributing towards payment of principal amount. Any prepayment made during the tenure of loan, is updated in the schedule accordingly, and provided to the borrower.

B. The 3 most important factors to be considered about your EMI

The lender giving loan, calculates the EMI, by taking 3 factors into account:
  • Amount of loan
    The amount borrowed by the borrower from the lender (Banks/ financial institution) for the purpose of buying the asset.
  • Rate of interest
    The interest rate levied by the bank or financial institution. This amount is charged on the amount borrowed.
  • Loan tenure
    This is the time period up to which the loan amount is to be repaid. It is agreed between the borrower and lender. Tenure of loan can be for a maximum of 30 years.
Consider this: James wanted to buy a house (priced at Rs 50 lakhs) for his family, but his total savings were just Rs 10 lakhs. He thought of taking a home loan for the remainder amount, but wasn’t sure if the EMI would be feasible. With the help of an EMI calculator, he was able to decipher the EMI, as well as the loan amount, that will fit his budget comfortably.

C. Using the EMI Calculator

EMI calculator is an online tool which enables you to calculate your EMI according to the loan amount, the interest rate and the tenure. With the help of this tool, you can calculate EMI within a fraction of seconds. It helps you make the desired changes in the loan amount, tenure and rate so that you can evaluate what fits your pocket the best.

EMI calculator can be used to calculate EMI not only for home loans but also for auto loan, personal loan, education loan etc. It analyzes the loans provided by banks/financial institutions and suggests the best possible loan depending upon your eligibility. This tool is abreast with latest information regarding the rate of interest, tenure of the loan, processing fees, prepayment charges, if any.

D. Benefits of using an EMI Calculator

The most important benefits of using EMI calculator are as follows:
  • Compares loan provided by different banks: This can otherwise be quite a cumbersome and tedious process. However, an EMI calculator does this with ease.
  • Flexibility to change the tenure, loan amount and interest rate: If you want to know how the EMI changes with say change in Loan Amount, Tenure or Interest Rate, you can do so by simply altering the values in the columns and getting the various results. It helps you by way of showing all possible options, without having to redo the calculations all over again.
  • Calculates EMI instantly and quite accurately without any time lag: This makes EMI Calculator a very handy and helpful tool.
  • Assesses an individual's capability and eligibility to take the loan: This helps you to understand how much loan you can avail and repay, since you have a ready-reckoner of your EMI that you need to repay every month.
The EMI calculator is one of the most important tools for any type of loan, and has thus gained immense popularity in today’s digital world. It has reduced time and increased efficiency, besides providing accurate results.

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